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shaw Glass Co., 348 U.S. 426 (1955). Exclusions from gross
income have been narrowly construed. United States v. Centennial
Sav. Bank, 499 U.S. 573 (1991).
Section 104(a)(2) provides an exclusion from income for "the
amount of any damages received * * * on account of personal
injuries or sickness". The term "damages" in section 104(a)(2)
encompasses amounts received pursuant to settlement agreements.
Sec. 1.104-1(c), Income Tax Regs. To be excludable, the under-
lying claim must be based on tort type rights, and the damages
must be received on account of personal injuries. O'Gilvie v.
United States, 519 U.S. __, 117 S. Ct. 459 (1996); Commissioner
v. Schleier, 515 U.S. __, 115 S. Ct. 2159, 2167 (1995).
The tax consequences of a settlement agreement depend on the
nature of the litigation and on the origin of the claim but not
on the validity of those claims. Woodward v. Commissioner, 397
U.S. 572 (1970). Where a settlement agreement lacks specific
language, the intent of the payor is the most important factor in
determining the nature of the claim being settled. Knuckles v.
Commissioner, 349 F.2d 610 (10th Cir. 1965), affg. T.C. Memo.
1964-33.
In his 1990 Federal income tax return, petitioner allocated
some of the proceeds received from PepsiCo to nontaxable amounts
received in settlement of a lawsuit under section 104(a)(2).
Petitioner, in connection with the transfer of PMI stock to
PepsiCo, signed a release which discharged his claims against
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